FSLR Up 4% on Restructuring Despite Goldman Cut, Cratering Demand

By Tiernan Ray

Shares of solar energy technology provider First Solar (FSLR) are up 82 cents, or 4%, at $21.64 after the shares were briefly halted in pre-market trading just before the company announced it will restructure “in response to deteriorating market conditions in Europe,” shutting down its manufacturing facility in Frankfurt, Germany, and idling production in Kulim, Malaysia.

CEO Mike Ahearn said the company’s current production was too large to meet existing demand as subsidies have dried up in Europe:

After a thorough analysis, it is clear the European market has deteriorated to the extent that our operations there are no longer economically sustainable, and maintaining those operations is not in the best long-term interest of our stakeholders […] The solar market has fundamentally changed […] After a period of robust growth, First Solar is scaled to operate at higher volumes than currently exist following the reduction of subsidies in key legacy markets. As a result, it is essential that we reduce production and decrease expenses to reflect the smaller volume of high-probability demand we forecast.

The company plans to lay off 2,000 people, or 30% of its staff.

The moves will cut expenses by $30 million to $60 million this year and by $100 million to $120 million annually in years to come, First Solar said. The company expects its cost to make solar modules to drop to 70 cents to 72 cents per watt this year, better than its prior estimate for 74 cents per watt, and to fall as low as 60 cents to 64 cents in 2013.

In response, Auriga’s Hari Chandra Polavarapu this morning reiterates a Buy rating on the shares, and a $53 price target, writing, “We view the restructuring as a sensible and realistic response to dislocated market conditions in solar PV that are aided by fickle subsidy policies in Europe impacting demand, and abetted by asymmetric competition/subsidies on the supply side from China.”

Interestingly enough, Goldman Sachs’s Brian Lee last night cut his rating on First Solar shares to Neutral from Buy and cut his price target to $24 from $45, writing that the stock has “less compelling risk/reward given limited near-term catalysts.”

The economics no longer work for First Solar, wrote Lee, given “the ongoing collapse in c-Si panel prices implies that First Solar is no longer the clear low-cost leader.”

Lee’s also concerned about the “lack of visibility into pipeline additions” in its projects business.

“We believe future projects will be harder to come by and will likely offer less attractive economics,” wrote Lee.

In case you wanted a worst-case perspective on the deterioration in demand, Axiom Capital’s unrepentant solar bear, Gordon Johnson, yesterday issued a bleak note on what subsidy trimming in Germany implies:

if Germany installed 1.9GW in C1Q12 as our German government sources have suggested, as shown in Figure 3 below, assuming Germany is 34% of aggregate global demand in C1Q12, as it was in 2011 (likely, an overly aggressive assumption given Germany likely accounted for significantly more of C1Q12 demand due to demand pull-in ahead of FiT decision), this suggests C1Q12 aggregated global demand of 5.588GW (1.9GW of installations in Germany ÷ 34% C1Q12 German market share = 5.588GW of aggregated global demand). Thus, at risk of stating the obvious, using our aggressive assumptions (in reality, Germany was likely >50% of global demand in C1Q12, suggesting C1Q12 aggregated global demand closer to 3.800GW), we see at least 2.130GW of excess shipments/earnings downside on the horizon for the solar cell/module vendors in C1Q12. We do not believe this dynamic is well understood at present given the German data point emerged just this morning.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.